Credit card debt and student loan debt are reaching staggering levels, so it should be no surprise that auto loan debt levels are closely following the same trend.
According to a recent report from Equifax, the total outstanding balance on auto loans is slightly over $924 billion as of August 2014, a record-high number and a rise of 10.8% over August 2013. That balance is spread out over 65 million outstanding loans, which is also a record high, representing a 6% increase from the previous year.
Is this good news or bad news? Auto loans are up because auto sales are up, which is definitely good for the overall economy.
Of course, the extra sales only help the economy if people are able to make their payments. Otherwise, we could be heading for an event similar to the housing market crash – perhaps called the “auto crash”?
Let’s look a little further into the details of the Equifax report, and throw in some data recently released by Experian.
- New Loans – New loans for the year through June are up 4.9% to a total of 12.5 million. These loans have a collective loan balance of over $254 billion, which is up 6.9%. Data from Experian shows that the average loan amount increased significantly in the third quarter of 2014, to $27,799 for new cars and $18,576 for used ones.
It appears that both loans and loan amounts are rising, and not proportionately.
- Lenders – The outstanding loan balances are split reasonably well between auto finance companies and traditional lending institutions such as banks and savings and loan associations. A slight majority of over $471 billion is held by the auto finance companies across 34.1 million loans, while traditional lenders hold a bit over $453 billion in auto loan debt across 31.4 million loans.
If we conclude there is a problem, we cannot point the finger at a specific source of lending – at least not based on the ratios of loans and balance amounts.
- Credit Score Profile – The Equifax study shows that the borrower profile has become more risky over the last year. With respect to June data, loan sizes are essentially the same for those with excellent credit scores of 760 or above, while the average loan amount for those with lesser credit (680 or below) increased by 3%.
- Subprime Loans – Subprime loans, defined by Equifax as loans made to borrowers with a score of 640 or lower, composed 31.2% of all the new auto loans originated in the first half of 2014, or 3.9 million – a small decrease over the previous year.
However, the balance on these new subprime loans is higher, reaching $70.7 billion – the most in eight years. At 27.9% of all auto loans, this represents an increased proportion as compared to last year.
The number of new subprime loans is decreasing slightly, but the loan amount is increasing – a bit of a concern but not necessarily a trend.
- Delinquencies – The amount of balances in serious delinquency dropped 8% to 1.05% of outstanding balances, suggesting no imminent issues.
- Loan Terms – Experian reported that almost 25% of new car loans had extended terms of 6.5-7 years to keep payments low. Thus, people are stretching their loan capabilities to the limit.
Should we be concerned? Higher risk has not shown up as higher delinquencies and defaults… yet. That will take time, just as it did with housing. For now, let us hope that banks and auto finance companies will monitor the situation and pull back on future credit responsibly if needed, something that did not happen in the housing sector until too late.
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